The Case for Pension Reform

As we head into the final days of the 2012 Regular Session, legislators will be taking action on several pension reform bills. The complex nature of the retirement system tends to obscure the importance of pension reform. This has contributed to an unfortunate lack of urgency over the years. But while the details can appear daunting, the crux of the matter is simple: Louisiana has promised its retirees more than it can deliver. Immediate steps should be taken to preserve the retirement system and protect taxpayers.

1. The Big Debt is not going away: The state’s growing Unfunded Accrued Liability (UAL) now approaches $20 billion. This astonishing debt threatens current and future taxpayers and retirees. The UAL eats into the current budget and makes it harder to dedicate adequate resources to current needs. Like a credit card that has been run past its limits, there is no painless way to fix the problem. But reforms that include switching from a defined benefit system, increasing employee contributions and raising the retirement age are necessary steps in the right direction.

2. Government employee benefits are unsustainable: At one time, state employees were provided generous benefits as compensation for their lower salaries. But government salaries have risen to private sector levels, and taxpayers should not be expected to fund benefits far more generous than their own. Likewise, the government retirement age is considerably lower than what is typically found in the private sector. State employees should be offered a fair benefit, particularly in light of the fact that they do not participate in Social Security. These reforms will result in a more reasonable and sustainable benefit plan.

3. Retirement benefits should accommodate contemporary career paths: Fewer people spend their careers in one place today. The current system incentivizes a career track that fewer people want while punishing those who may want to spend just a portion of their career in government. The portability of the cash-balance plan provides greater flexibility, resulting in fewer government workers who stay put for the sake of a generous retirement benefit.

4. Defined benefit pensions are inherently flawed: Reform opponents claim that our current predicament is simply a product of past legislatures failing to fund the retirement system. While that is a contributing factor, the causes for Louisiana’s UAL are numerous. Further, underfunded defined benefit pensions are a national phenomenon. This points to an inherent flaw in the defined benefit system: It incentivizes legislators to offer state employees low retirement ages, generous cost-of-living adjustments and other costly perks that will be funded by someone else. Switching to the cash-balance plan will limit the ability of policymakers to indebt future generations while offering state employees security and portability.

5. The alternatives are worse: The alternatives to meaningful reform include drastic tax hikes and/or spending cuts. Few policymakers or constituents welcome the prospect of paying more and getting less. Further, the proposed changes do not unduly burden current employees. Important changes, like the cash-balance plan, will only impact new hires and the retirement age increase will be phased in. These modest adjustments will be less traumatic than tax increases and spending cuts, to say nothing of the full-blown crisis awaiting Louisiana if legislators continue to postpone the inevitable.

Conclusion

“The best time to plant a tree is twenty years ago. The second best time is now.”

This is an appropriate proverb for Louisiana legislators. It would have been less painful for everyone involved if the UAL had been addressed years ago. But time and again, decisions were made that prevented the proper funding of state pensions and increased the UAL.

Pension reform critics focus on alleged problems with the bills but offer no meaningful alternatives. Now legislators are presented with a stark option: Do nothing, and let this debt continue to spiral out of control; or take action, and put Louisiana on the path to long-term sustainability.

We are past the point where new investment strategies, stock market gains or economic growth will offer policymakers a convenient escape hatch. Pension reform is long overdue, and legislators can demonstrate a commitment to responsible governance by voting in favor of the bills sponsored by Sen. Guillory and Rep. Pearson.

Kevin Kane is the president of the Pelican Institute for Public Policy